The squid giant axon and extruded axoplasm from the giant axon were used to study the capacity of axoplasm for phospholipid synthesis. Extruded axoplasm suspended in an artificial medium, catalyzed the synthesis of phospholipids from all of the precursors tested. P-32-labeled inorganic phosphate and gamma-labeled ATP were primarily incorporated into phosphatidylinositol phosphate, while [2-H-3] myoinositol, [H-3-methyl], choline, and [L H-3] serine were mainly incorporated into phosphatidylinositol, phosphatidylcholine, and phosphatidylserine, respectively. [2-H-3] glycerol was incorporated mainly into phosphatidic acid, phosphatidylionositol and triglyceride. These findings demonstrate that all classes of axoplasmic phospholipids can be formed locally, by synthetic enzymes present in axoplasm. Ethanol significantly altered lipid synthesis in extruded axaplasm. Ethanol increased cholesterol synthesis almost by a factor of two, and phosphatidylserine synthesis was also elevated by ethanol. The results should provide an increased understanding of the mechanisms involved in lipid and cholesterol metabolism in nervous tissue, and the effects of ethanol on those mechanisms.